China is losing its bet on chips
November 16, 2020
Apple is making its first Mac computers since 2005 without an Intel microprocessor. Instead, the company announced last week, Macs will use Apple’s own M1 processor, fabricated by TSMC, the Taiwan Semiconductor Manufacturing Co. Hey, nothing personal, Intel—by now the whole industry knows you botched your transition to sub-10-nanometer chips and are still behind. But this has implications way beyond computing.
If Intel is a few years behind, China’s lag may be closer to a decade. In conjunction with formulating its 14th Five Year Plan, Beijing put out an official communiqué (I love that word!) previewing its “protracted battle” with the U.S. and stated, “Technology self-reliance is the strategic support for national development.” What’s scary is that China may have to draw this battle line right through Taiwan, where Apple gets its processors. We now see headlines like this in the Asia Times: “US tech giants exposed if China takes Taiwan.” Ya think? Let’s break this down.
To begin, note that last year China produced only 16% of the semiconductors it consumed domestically. In 2014, China announced a National Integrated Circuit Plan promising to spend $150 billion to expand local semiconductor manufacturing. It didn’t work because you can’t throw money at the problem. The world is littered with companies (AT&T, General Motors) and countries (France, Italy, Russia) that failed at semiconductor production. It takes state-of-the-art equipment and homegrown expertise.
Second, to produce wicked-fast chips for smartphones, 5G and certainly the latest precision weapons, you need fabrication facilities, or fabs, that can turn out 7- or even 5-nanometer chips, which isn’t easy to do. According to Mike Brown, director of the Pentagon’s Defense Innovation Unit, “50% of advance semiconductor production is in Taiwan.” The rest is in the U.S., South Korea and Israel.
Third, the Trump administration cut off China’s Huawei from buying advanced chips made by TSMC. Except for Intel and Samsung, most everyone uses TSMC, including U.S. companies Nvidia and Advanced Micro Devices.
Fourth, for about five years, Intel has been stuck at 14-nanometer chips. This gets confusing: I spent most of my early career tracking the chip business, and I still get headaches digging into their guts. What Intel calls 14 nanometers, TSMC calls 10 nanometers. To get to sub-10, you need to use photolithography with extreme ultraviolet light, or EUV, to etch tiny lines onto chips. Intel has said it won’t start producing 10-nanometer chips (the equivalent of TMSC’s 7 nanometers) until late 2021. Intel may even buy chips from TSMC!
Fifth, China has many partly state-owned semiconductor companies, like the Semiconductor Manufacturing International Corp., or SMIC, but none have caught up to TSMC because of another four letters, ASML. This is the Dutch equipment company that makes the only EUV photolithography machines. This from ASML: “EUV lithography uses light with a wavelength of just 13.5 nanometers (nearly x-ray level), a reduction of almost 14 times that of the other enabling lithography solution in advanced chipmaking, DUV (deep ultraviolet) lithography, which uses 193-nanometer light.” Oh, and ASML is not allowed to sell to China for defense reasons. So for now, China is locked out of sub-10-nanometer technology. Sure, it could invent its own EUV, but that might take a decade.
Finally, geopolitics steps in with a lot of what-ifs. If China’s self-reliance initiative fails, and a Biden administration continues an advanced chip embargo—which it should—China would be in a bind, much as the 1941 oil embargo of Japan may have forced its hand. China’s military, in an arms race with the U.S., has to be nervous about being locked out of sub-10-nanometer chips. Beijing is likely gaming out the costs and benefits of bringing Taiwan’s capacity under its control, even as the U.S. weighs defending it: TSMC has five fabs on a single campus, Hsinchu Science Park.
But even that bold step would likely fail almost right away. Unlike an assembly line or an oil refinery, making chips is fickle. The formula might be written down but is really in the head of TSMC’s engineers and is tweaked almost daily. A Silicon Valley engineer once accidentally spilled ink into a fab’s water supply—and output yields went up! A forced Taiwan takeover would crater output even if China brought in mainland engineers. It’s more art than science.
After a forced takeover, the next plausible fear is a few well-placed Chinese missiles taking out half of the world’s advanced chip production, and of course a big chunk of the global economy. But the shock waves from that move would damage China’s economy even more than the pandemic did. Still, I hope TSMC factories are guarded by banks of Patriot missiles. I’d put some of those around ASML’s Dutch facilities too.
It may take a few years, but Intel will catch up. China may too. Meanwhile, it’s smart to diversify where advanced chips are made. The Trump administration got TSMC to agree to build a fab in Arizona, spending $12 billion by 2029. That’s a start.